Exchanges Promise A Major Transition

Without a doubt, the biggest event of this year has been the formation of the three major exchanges: the WorldWide Retail Exchange (WWRE), the Global Network Exchange (GNX), and Transora (the partnership of grocery manufacturers). These three exchanges, when combined with the standards-setting efforts of UCCnet, could change the food industry in ways we can only imagine today.

One thing is clear: The change will happen at an extraordinary rate. I believe that this change will also evolve and that it would be difficult, if not impossible, for anyone to predict today how these exchanges will be functioning three years from now. However, I think there are some logical first steps in the implementation process. This month I'd like to share my ideas with you about what they might be and how they could affect your company. More important, I'll identify what your company could be doing to prepare for the impact of these exchanges on your business.

Let's start with the practical realities of these efforts. Two of these exchanges, WWRE and Transora, are growing rapidly. They are both attracting the largest companies in their segments of the business. This assures that these organizations have the resources to sustain the growth process and to resist the inevitable challenges to the concepts. And there will be challenges.

Without a doubt, the Federal Trade Commission, and even the attorney general's office, will be watching the business process closely to ensure that no antitrust violations are likely to occur. Anticipating this issue, every exchange will be careful how it prioritizes and implements new trading ventures.

I believe any effort at power buying of nationally branded products will be a second-stage effort, with the initial focus on the purchase of commodity products, particularly for private label items like paper goods, soap, and canned fruits and vegetables. This form of buying could severely challenge the benefits historically associated with the existing private label buying groups like TOPCO and IGA. If the massive buying power of these exchanges works as it should, they can drive down prices for all participating companies. While the price differences may not be overwhelming, they certainly could result in a competitive edge.

Transora's announced primary thrust is in buying the raw materials that are used in manufacturing consumer packaged goods. That would imply everything from wrapping supplies to wheat to spices. However, it would be counterproductive for all of the companies participating in Transora to have to build duplicate data files so they can technically interface with both Transora and other exchanges. The situation is not unlike the one that existed when the concept of scanning was being developed. Having more than one kind of scannable symbol would have been crazy.

A Common Infrastructure

All exchanges need to agree on some basic standards and, hopefully, there will be some common technical infrastructure shared by many of them (the Global Commerce Initiative?GCI?is the standards-setting body made up of the exchange members as well as other major companies in the industry). That infrastructure should be applicable to activities using the exchanges as well as to direct buying activities outside of the exchange infrastructure. An example of this would be scan-based trading.

One of the first steps in scan-based trading is to synchronize your company's data with that of your suppliers. In the GMA-sponsored pilot project just completed, a company called viaLink provided the facilities for both the retailers and the DSD companies to synchronize their information about products, base costs, and the promotional discounts associated with the base costs (final pilot test results are available from GMA). It was interesting to see that when WWRE selected the technology companies to support its new business, one of those companies was viaLink. I would not be surprised to see the other exchanges also select viaLink as a component of their strategies to provide the element of synchronization.

As any reader of my column will know, I am very bullish on the benefits of scan-based trading. And I believe those benefits transcend the DSD categories and create a platform for efficiencies in other product categories. Managing the industry's cost and promotional structure across many stores and many geographies is a major technical task. It would seem to me that having a consistent "custodian" of this complex data would provide a bridge between synchronizations.

If you accept my conclusions about the benefits from SBT, then the implementation does not require in any way that your company join one of the exchanges. However, once your data is synchronized you will find your company has made a significant amount of the technical investment necessary to take advantage of the exchanges' activities. For this reason, I believe that many mid-range and independent retailers will capitalize on the tactical opportunities associated with synchronization.

The industry also needs a set of standards to describe both products in the retail format and the raw materials that are components of products. While there is obviously more technical data required to describe a raw material, or even packaging supplies, I believe that this requirement could be addressed within the data structure of any powerful relational database with linkages to the basic product and pricing information that so frequently must be exchanged between buyer and seller.

We can thank UCCnet for its pioneering work on the standards, and all of those companies that helped to prove the concepts and work on the standards-setting process. However, I suspect that their efforts to create an industry-wide Internet network were doomed from the beginning. In hindsight, it was perhaps inevitable that the biggest retailers in the world would choose to control their own destiny, and the network is clearly one of the dimensions of control.

So, where will the exchanges begin? The first steps are obvious. They must build a secure extranet and define the structure of the data warehouse that will be needed for synchronization of data between buyers and sellers. Synchronization and a secure network are the foundation for all activities.

The next step will be to test the potential with some established business technology. EDI is obviously a no-risk activity; placing synchronized purchase orders using the exchange, for example, is a simple test of process. In and of itself it will not create consequential savings for the participants, but it does prove the process.

If I were to bet, the next efforts will involve auctions, with one or more participating buyers offering to purchase consumer packaged goods manufactured to their specifications. This could provide a real test or demonstration of the potential benefits of an exchange. For multi-division chains, the act of synchronizing all products sold in all divisions should permit corporate merchandisers to see current product costs across their company. This could be a major benefit and provide the foundation for future negotiations with national brand vendors.

Not All the Business

For those readers whose companies are not yet committed to participation in one of the major exchanges, the issue is what should they do. First, realize that all the business of any participating retailer will not be driven through these exchanges. For an extended period of time, and perhaps forever, there will be classes of suppliers who will be handled in a more traditional manner.

There are many vertical exchanges, particularly those handling the purchase of perishables, that will be courting your business. These exchanges provide the infrastructure for acquiring fish, meat, produce, and flowers directly from the source. Since these areas need product-specific expertise, it is likely that some of the exchanges will survive, even in direct competition with their worldwide counterparts. In fact, I expect to see the largest exchanges select vertical Net partners who will be directly accessed from within their exchanges.

Synchronization is necessary to be efficient and competitive. Even if your company isn't ready for SBT, you still have a high percentage of purchase orders for which you are forced to take invoice deductions, and most of those can be eliminated with synchronization. Even expanding your current level of EDI will be easier if you move to the Internet to deliver your information. Because the UPC is rarely used as the company's item identification number, any synchronization service must "translate" the trading partner's item codes so that each partner sees the item information as it would recognize it. These "virtual views" of the data allow each trading partner to focus on getting its part of the trading data right instead of worrying about how to present the data back to the other partner in an acceptable format.

This will give you the capability to expand your EDI partnering efforts.

While it would be desirable to have the high-security communications that will be offered by the major exchanges, you can also install an acceptable, secure corporate Internet facility. All in all, there are many things that can be done that will move your business in the right direction, positioning it for future participation in an exchange.

When I began my career in the food industry in the 1960s, we relied on the technical leadership of the country's largest chains. Kroger was "the industry's industrial engineer" and, along with other major chains, always accepted the responsibility for testing new technologies and staffing industry projects.

Then in the early 1980s the largest chains began to shift their priorities to internal issues. By the 1990s all industry leadership projects were undertaken by regional chains, typically family-run operations such as Wegmans, Schnucks, Randall's, H-E-B, and Ukrop's.

With the recent launch of the Internet exchanges many mid-range chains and wholesalers are trying to understand both the concepts of these exchanges and how their operation will impact their businesses. The largest retailers in the world appear to have moved back to a position of industy leadership. The unanswered question is whether the large retailers view their position solely as enlightened self-interest or as coupled with an acceptance of the need to provide leadership to the entire industry.

Technology editor Richard Shulman is president of Dix Hills, N.Y.-based Industry Systems Development Corp. He can be reached at ISD@worldnet.att.net.